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PCE price index rose 0.2% in July, matching expectations

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Consumer spending rose 0.5% in July

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Market focus shifts towards jobs and labor over inflation

(Updated at 2:17 p.m. ET/1817 GMT)

By Chuck Mikolajczak

NEW YORK, Aug 30 (Reuters) - U.S. Treasury yields

advanced on Friday, with the benchmark 10-year note set to snap

a two-week streak of declines, after economic data raised

expectations the Federal Reserve was likely to opt for a small

rate cut at its September meeting.

The Commerce Department said the personal consumption

expenditures (PCE) price index rose 0.2% last month, matching

expectations of economists polled by Reuters, after an unrevised

0.1% gain in June. In the 12 months through July, the PCE price

index increased 2.5%, matching June's gain.

"Income and spending were a little better than expected

while inflation was in line with expectations. This can

reinforce the idea that the Fed has stuck the landing," said

Brian Jacobsen, chief economist at Annex Wealth Management in

Menomonee Falls, Wisconsin.

Consumer spending, which accounts for more than two-thirds

of U.S. economic activity, rose 0.5% last month, also meeting

expectations, after advancing by an unrevised 0.3% in June to

show a strong economy early in the third quarter.

"The market's focus is shifting more towards jobs and labor

rather than inflation. It feels like the market's pretty well

convinced that inflation is moving in the right direction," said

Thomas Urano, co-chief investment officer at Sage Advisory in

Austin, Texas.

"As long as it continues to move in that direction, then the

focus is going to be on growth and in the job market."

The U.S. 10-year Treasury note yield rose 3.8

basis points to 3.905%, on track for its fifth straight daily

gain and first weekly rise in three. However, the yield was

still on course for fourth straight monthly decline.

Markets are fully pricing in a rate cut of at least 25 basis

points at the Fed's mid-September meeting. Expectations for a 50

basis point cut dipped to 30.5% after the data, however, from

34% on Thursday, CME's FedWatch Tool showed.

The 30-year bond yield climbed 4.4 basis points

to 4.196%. The yield was set to snap a two-week streak of

declines but was also poised for a fourth straight monthly

drop.

Fed Chair Powell last week flagged the cooling in the labor

market, which signaled a shift in the Fed's focus towards the

job market over fighting inflation.

A survey from the University of Michigan showed consumer

sentiment edged up to 67.9 in August from July's eight-month low

of 66.4, snapping a four-month slide, while inflation is

expected to continue to moderate.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between two- and 10-year Treasury notes

, seen as an indicator of economic expectations, was

at a negative 2 basis points.

The two-year U.S. Treasury yield, which typically

moves in step with interest rate expectations, rose 3.2 basis

points to 3.925%. The yield was barely higher on the week but

set for a fourth consecutive monthly decline.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.046% after closing at 2.057% on Aug. 29.

The 10-year TIPS breakeven rate was last at

2.154%, indicating the market sees inflation averaging about

2.2% a year for the next decade.